An Introduction to Stock Options

    Stock options are typically meant for advanced investors only, providing them with additional opportunities for potentially rewarding returns, though at a certain amount of risk, requiring some level of knowledge on the operation of financial markets and options themselves. An option is a type of financial market specific contract entitling the purchaser to buy or sell the underlying stock at the stated price. The call option gives the holder the right to buy the underlying stock while the put option gives the holder the right to sell the underlying stock.


    Risk needs to be managed and watched very closely when dealing with financial options. The owner of the given option bears the risk (financial risk) which is limited only to the value of the paid premium, while the risk of the of the seller of the given financial is typically not limited. This is a vital fact and must be always observed with the utmost care when handling (selling and purchasing) options.

    The value of the particular stock option is also quite tricky. Typically, it is valuable to the extent that the exercise price is below the market value of the underlying stock at the time you choose to exercise the option by buying shares. The time value of the option is the potential that the share price will rise over time and eventually exceed the option exercise price.
Be also pretty careful with the employee stock options, since they may be treated as tax-qualified incentive stock options (ISOs) or nonqualified stock options (NSOs) – that impacts directly the price of the shares and the interest which You can expect from the given option upon its sale. The conditions which are applicable to both options of this type depend on the country where the given market operations are carried out. Be sure to observe the terms and conditions applicable in the given case. Sometimes minimum hold periods are applicable, preventing rapid purchase/sale cycles and speculations. However, the length of such a hold period depends on the conditions of the particular options. In a general case, it is always better to consult a senior financial adviser prior to taking any commitments of this time on your own.

    If You happen to own options or are planning to do so, be sure to track the current share prices of the stocks associated with the given stock options. It is always better to have an extended set of information on the prices of the particular set of shares included in the given option. Make sure that your options are part of a well-diversified overall asset allocation – doing an in-depth research on the companies, shares and markets is always a good way to start when investing a significant amount of money. Check also all of the tax and fee payment rules which may be applicable in the case of shares and/or options which You own / are planning to own in the near future. If You are not certain about the applicable regulations or feel not knowledgeable enough to do it on your own, consider meeting with a tax advisor or financial professional. This will help You understand how your options could affect your tax and investment strategies.

    Options, when handled properly, can offer significant potential advantages though some with inherent risk issues and require appropriate management. Before investing in options, it is important to thoroughly understand the potential risks and benefits. You should consult a qualified tax advisor as to how option transactions may affect your tax situation. Sometimes buying a good guide to the process may help if You’re planning to do a significant investment or are a newbie hoping to earn some money on a financial market. If you are an employee and have received stock options as employee compensation, consider carefully what to do and how to proceed with the options which are in Your possession. Sometimes selling them of immediately is not the best available option.

 
Managing Retirement Assets in the Event of a Layoff

    In the era of global market, companies try to follow the economic cycles and global competition resulting in potential employee layoffs in the times of lowered prosperity. Once laid off, employees have to decide what to do with their retirement plan assets, most of which end up cashing on the money they have and starting looking for a new post. This may not necessarily be the best way out of the situation, since it is expensive – large fraction of Your money is taken up by taxes and related expenses, thus use with caution and only when You cannot manage otherwise.
    In a general case, three options are available after a layoff:

  1. leave your money in the existing plan;
  2. take a cash, or a "lump-sum," distribution; or
  3. transfer the money to another retirement savings account, which may be available in the country of the residence.

    Option #1 is the most advisable approach. Leave the money You saved so far on a tax-deferred or tax-free account and let it grow there. Although you are generally  no longer be allowed to contribute to the plan, you will still have control over how your money is invested among the plan's investment selections. This is important when You consider Your future.

    Option #2 is much less attractive. A lump-sum cash-out option always includes a 20% withholding on the pre-tax contributions, which the plan is obligated to pay the IRS to cover federal income taxes, and a 10% early withdrawal penalty if you separate from service before age 55. These are typical conditions though may be different in the country of residence.

    Option #3 should be considered typically before plunging to a one-time/extended cash-out. Such a fund transfer may be subject to special tax / fees as well as other conditions as stipulated by the given bank and/or fund. Check local conditions which could apply to such a fund transfer or contact Your trusted financial advisor for help.


    When unemployed, most people are tempted to take advantage of the retirement fund to supplement a temporary income, though it is generally advised to refrain from that, looking at other potential financial sources, including e.g. savings accounts or other liquid investments, equity loans or lines of credit taken against your house/car etc. If that does not work however for You and you still find it necessary to take advantage of Your retirement fund, remember to limit yourself as much as possible since that impacts the future retirement payments You might want to take advantage some time. Make sure that before taking advantage of this particular option, You do check all the other options are discussed above.

    As soon as You so get hold of any stable employment, be sure however to check closely how much money You drew from Your fund and attempt to replenish it as soon as possible. This way You will have a complete retirement fund if You run into another layoff in the future. Remember that what happens once may as well happen again, so it is better to be ready than sorry should such a day come. Sign up to participate in your new employer's retirement plan as soon as you become eligible to do so. Contribute as much as possible – this way You can prepare a cash reserve for Yourself and Your family not only for retirement but also in the case of any potential future layoff.